Please cite this paper as:

OECD (2001), “Private Initiatives for CorporateResponsibility: An Analysis”, OECD Working Papers onInternational Investment, 2001/01, OECD Publishing.http://dx.doi.org/10.1787/816826411085

OECD Working Papers on InternationalInvestment 2001/01

Private Initiatives forCorporate Responsibility

AN ANALYSIS

OECD

DIRECTORATE FOR FINANCIAL, FISCAL AND ENTERPRISE AFFAIRS

WORKING PAPERS ON INTERNATIONAL INVESTMENTNumber 2001/1

Private Initiatives for Corporate Responsibility:An Analysis

February 2001

This paper will form part of a forthcoming OECD publication entitled CorporateResponsibility: Private Initiatives and Public Goals which will be published in May2001. The contents have been discussed by the Committee on InternationalInvestment and Multinational Enterprises and the publication will be released on theauthority of the Secretary General of the OECD.

Organisation for Economic Co-operation and Development 2001

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TABLE OF CONTENTS

Executive Summary.....................................................................................................................................3I. Introduction ..........................................................................................................................................5II. The record to date.................................................................................................................................7

II.1 Consensus -- a basic building block for the effective control of business conduct.....................9II.2. Expertise: human capital and the social control of organisations .............................................12

III. Costs and benefits of voluntary initiatives......................................................................................13III.1. The benefits for firms................................................................................................................14III.2. The benefits to society...............................................................................................................15III.3 The effectiveness of voluntary initiatives: Do they change company behaviour? ....................16III.4. Voluntary initiatives in a broader governance context..............................................................18III.5. Cost uncertainty and unintended consequences ........................................................................19

IV. Implications for International Economic Policy .............................................................................21

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Private Initiatives for Corporate Responsibility: An Analysis

Executive Summary

1. Voluntary initiatives in the area of corporate responsibility have been among the major trends ininternational business in recent years. Business surveys show that most large OECD-based multinationalenterprises have participated in this trend in one way or another. These initiatives involve, first, theissuance of codes of corporate conduct setting forth commitments in such areas as labour relations,environmental management, human rights, consumer protection, disclosure and fighting corruption. Thesecodes are often backed up by management systems that help firms respect their commitments in their day-to-day operations. More recent developments include work on management, reporting and auditingstandards and of the emergence of supporting institutions (e.g. professional societies, consulting andauditing services).

2. This paper analyses the results of a fact-finding project on business approaches to corporateresponsibility (see OECD/DAF/IME(2000)15 and its annexes). In so doing, it places the corporateresponsibility in its broader governance setting, recognising that voluntary initiatives have a crucial, butnecessarily only partial, role to play in the effective control of business conduct.

3. The paper also looks at the contribution that voluntary initiatives have made to the accumulationof two types of intangible capital that are needed to make legal, regulatory or voluntary systems ofbehavioural control effective. The first of these is consensus -- the widespread agreement or consent of thepeople and organisations covered by the controls. Consensus promotes what has come to be known inenforcement circles as “voluntary compliance”, that is adherence to behavioural norms that is not due toformal enforcement. The second is the managerial expertise that allows firms to translate general principlesinto coherent behaviour and response for the organisation.

4. The key findings are as follows:

• Global phenomenon. Voluntary initiatives are a global phenomenon, but there are significantintra-regional variations in practice.

• Some initiatives are more voluntary than others. Although the initiatives are often referred to as“voluntary”, some firms are under strong pressures to adopt them. Such pressures stem fromlegal and regulatory arrangements, from employees, from the need to protect brand or reputationcapital and from civil society. For other firms, however, such pressures can be weak (e.g. forthose with low public visibility).

• Divergences of commitment and management practice. There appear to be wide divergences ofcommitment even in relatively narrowly defined issue areas (e.g. labour standards in brandedapparel, environmental and human rights commitments by extractive industries, fighting bribery).This is not necessarily a problem, since there can be no “one-size-fits-all” approach tocommitment in business conduct. On the other hand, they may point to a need to continue thepublic debate on what exactly constitutes appropriate behaviour for the different ethicalchallenges that confront international business. Similarly, management practices in support ofcommitments vary significantly. Some firms have adopted advanced practices while others haveyet to translate their codes into management controls.

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• First steps toward an eventual consensus on global norms for business conduct. The corporateresponsibility movement has provided a channel through which various actors -- businesses,business associations, governments, trade unions, intergovernmental organisations and NGOs --can debate various standards of commitment. The amount of dialogue and mutual influenceamong these actors has been significant.

• Accumulation of managerial expertise in ethical and legal compliance. Voluntary initiatives incorporate responsibility have promoted the accumulation of the management expertise needed totranslate legal compliance and ethical norms into the day-to-day operations of companies. Theinstitutional supports for this expertise -- management standards, professional societies,specialised consulting and auditing services -- help lower the costs of legal and ethicalcompliance as well as making it more effective. Non-financial auditing and reporting standardsare a more recent phenomenon and they are still relatively weak.

• The costs of voluntary initiatives for corporate responsibility. The fact-finding project containslittle information on the costs of these initiatives in specific business settings because little isavailable. It is expected that, as experience with the initiatives grows, businesses will add to theirknowledge of both costs and benefits. Uncertainty also gives rise to the possibility that corporateresponsibility initiatives will have “unintended consequences”. In particular, this means thatwell-intended initiatives occasionally have adverse, unforeseen effects. This risk underscores theneed to proceed carefully and with adequate knowledge of local circumstances.

• The benefits for individual companies and for society. The benefits of these initiatives for firmsare potentially numerous. They include improved legal compliance, management of litigationrisks, brand and reputation enhancement and smoother relations with shareholders and withsociety. Some initiatives have also allowed industries to deflect calls for formal regulation.Finally, companies use the initiatives to improve employee morale and to promote a “culture ofintegrity” within the firm. Societies gain inasmuch as these initiatives reflect business sectorattempts to translate external pressures for corporate responsibility (law, regulation, publicopinion) and internal pressures (coming from employees) into concrete business practice.

• The effectiveness of voluntary initiatives. It is clear that an informal system based on only wordof mouth or direct hierarchical control would not be sufficient to allow large, complex companiesto respect their legal and ethical commitments. These companies need to communicateeffectively with thousands of employees and to use diverse compliance tools -- effectivelydeployed in a coherent management system. Private initiatives are the expression of managerialexpertise that allows companies to blend profit pressures with non-financial pressures intocoherent business activity and response. However, in the non-financial dimension, theseinitiatives have no more credibility or force than the social, legal and regulatory pressures thatshape them. If private initiatives are successful, this attests not only to the competence of thebusiness community, but also to the abilities of societies to formulate, communicate and channelreasonable pressures for appropriate business conduct. Thus, the effectiveness of these initiativesis closely linked to the effectiveness of the broader systems of private and public governancefrom which they emerge -- private initiatives cannot work well if other parts of the system workpoorly.

• A role for the OECD Guidelines for Multinational Enterprises. As the only multilaterallyendorsed comprehensive code of conduct, the Guidelines have an important role to play in thisongoing process. The Guidelines institutions could be used to strengthen and encourage theemergence of consensus and to contribute to the accumulation and dissemination of expertise.

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I. Introduction

Voluntary initiatives in the area ofcorporate responsibility areamong the major trends ininternational business in recentyears. The initiatives include theissuance of codes of conduct, theimplementation of associatedmanagement systems and, moreinfrequently, the adoption ofspecial reporting practices.

5. As globalisation has broadened and deepened the tieslinking the world’s regions, the concern that the benefits ofglobalisation for business should be matched by requirements forresponsible behaviour has been repeatedly expressed in publicdiscussions. Although there is little agreement about the exactcontent and form of such requirements, a number of public andprivate responses have emerged. Recent public initiatives includethe adoption of the ILO Convention 182 on the worst forms of childlabour and the successful revision of the OECD Guidelines forMultinational Enterprises. Private responses to these concerns haveemerged in the form of voluntary initiatives to define appropriatenorms for business conduct. These corporate responsibilityinitiatives involve the issuance of codes of conduct, which set forthcommitments and behavioural guidelines in such areas as labourrelations, environment, consumer protection and fighting bribery.The codes are often backed up by accompanying managementsystems that help companies respect their legal and ethicalcommitments in their day-to-day operations. Prototypes for non-financial disclosure and reporting standards -- which help firmscommunicate their commitments, practices and performance to theoutside world -- have emerged more recently. These initiatives drawon management principles and practices that have developed onlyover the past 25 years or so.

There is a considerabledisagreement about howmeaningful these initiatives are.Some view them as the firsttentative steps toward globalconvergence of business practices,while others see them primarily asa public relations effort by thebusiness community.

6. However, there is little agreement about exactly what theseinitiatives mean. Some believe that they constitute a first step inbuilding reasonable behavioural standards from the ground up andthat voluntary, decentralised approaches offer the flexibility neededto adapt to regional and sectoral circumstances and to acquirenecessary knowledge and experience. Others view these efforts aslittle more than public relations ploys and would favour replacingthem with binding rules of the game involving sanctions andgovernment-directed enforcement mechanisms1. Only thesearrangements, they feel, will give the standards enough “teeth” toinfluence corporate behaviour in a meaningful way.

1 An example of this kind of position can be found in the NGO statement made at the adoption of the revisedOECD Guidelines for Multinational Enterprises. The statement says: “Governments have accepted theargument put forcefully by business during the review that the Guidelines should not be “mandatory in factor effect”. The undersigned NGOs believe that this concession is fundamentally out of step with theexperience and expectations of many communities around the world… As a result, NGOs will continue tocall for a binding international instrument to regulate the conduct of multinational corporations.” (page 23).(OECD 2000)

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Recent practice in regulatory andmanagement control emphasisesthe need to create the intangibleassets that facilitate compliancewith appropriate norms forbusiness behaviour.

7. The challenge of building up global norms largely “fromscratch” places a premium on understanding the basic buildingblocks that support effective systems for controlling businessconduct. Recent thinking emphasises the importance of intangibleassets that support such systems of regulation or “softer” forms ofsocial control of business. It says that many of the essentialingredients of any system of regulation, law or informal control ofbusiness -- those that help determine whether or not the system iseffective -- are invisible to the eye. They cannot be read about inlaw statutes, written down explicitly in contracts or in internationalagreements or discerned by looking at a particular enforcementapparatus.

This paper focuses on two suchintangible assets -- consensus oragreement with the norms and themanagement expertise needed tocomply with them.

8. This paper focuses on two such intangible assets. The firstis consensus -- or widespread agreement with and acceptance ofbehavioural norms among the people and organisations covered bythem. The belief that compliance with behavioural norms resultssolely from monitoring and threats of punishment is not supportedby OECD experience. On the contrary, compliance in democraticsocieties tends to be more voluntary than enforced. The secondintangible asset is expertise -- the “human capital” that, it is arguedhere, has become an essential building block for successful systemsof control of business conduct, regardless of whether these controlsare private or public. The challenge for building global norms is toaccumulate these intangible assets -- consensus and expertise -- onan international scale. One of the main findings of this paper is thatvoluntary initiatives are making significant contributions to theglobal accumulation of both, but that much remains to be done.

This paper analyses the results ofa fact-finding mission oncorporate responsibility that werereported in earlier papers.

9. The present paper analyses the results of a fact-findingproject on private initiatives in the area of corporate responsibility.That project was authorised by the CIME at its June 1999 meeting2.The fact-finding results were reported to the CIME at its September2000 meeting (DAFFE/IME(2000)15) and its six annexes3. Thispaper begins by reviewing and assessing the record of privateinitiatives to date -- in general terms, what has been accomplishedand what may be accomplished in the coming years. The nextsession examines the question of costs and benefits. The thirdsection draws out implications of the above for policy makers.

2 The Working Party of the Trade Committee also authorised work in this area. Annex 1 of the six annexseries was produced in co-operation with Trade.

3 . The six annexes are as follows -- DAFFE/IME(2000)15/ANN1 “Codes of Corporate Conduct: AnExpanded Inventory”; DAFFE/IME(2000)15/ANN2 “Making Codes of Conduct Work: Control Systemsand Corporate Responsibility”; DAFFE/IME(2000)15/ANN3 “Environmental Practices of EuropeanCorporations: Policy, Management Systems and Reporting”; DAFFE/IME(2000)15/ANN4 “CorporateEnvironmental Management Practices in Asia: Experiences of Non-Member Economies”;DAFFE/IME(2000)15/ANN5 “Public Policy and Voluntary Initiatives: What Roles have GovernmentsPlayed?”; DAFFE/IME(2000)15/ANN6 “Corporate Environmental Management Practices in Japan”.

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II. The record to date

The fact-finding results suggeststhat these voluntary initiativesform a global trend, but that thereare significant intra-regionalvariations in practice.

10. Voluntary efforts to develop appropriate and meaningfulstandards of conduct have been a recent prominent development ininternational business. The fact-finding effort suggests that thistrend is global in scale, but that it also shows large intra-regionalvariations. The OECD inventory contains codes from the majorityof member countries (see Annex 1). The study of environmentalmanagement practices (Annexes 3 and 6) shows that they arecommon among many European and Japanese firms, while the studyof non-member Asian companies (Annex 4) also suggestedsignificant, but variable, involvement.

Although these initiatives arereferred to as “voluntary”, firmsare under varying degrees ofexternal pressure to undertakethem. OECD governments havebeen very active in shaping theinitiatives through regulatory andlegal enforcement. Protection ofbrand and reputation capital isalso an important consideration.

11. The fact-finding mission underscores the nuances that arenecessary when referring to these initiatives as “voluntary”.Webster’s dictionary defines “voluntary” as “acting or done with noexternal compulsion or persuasion.” The inventory of how publicpolicy influences these initiatives highlights the fact that, often, thereare powerful regulatory or legal pressures acting firms undertakingthese initiatives4. The fact-finding paper (Annex 5) notes thatprivate initiatives have been incorporated into public regulatory andlaw enforcement strategy in such diverse areas as environment (inthe European Union, among others), occupational health and safety(the United States), combating money laundering (Switzerland),food safety (in the United States), competition policy (in Australiaand Canada) and, in the United States, any corporate criminalactivity that falls under the Federal Sentencing Guidelines.Likewise, for companies with significant brand or reputation capital,threats of NGO campaigns (of the type that have been waged againstvarious brand-based retailers and against some extractive industryfirms) confront them with potentially large capital losses5. Thus,firms face varying intensities of pressure to engage in these“voluntary” practices -- they may be intense on some, but relativelyweak for firms with low public visibility, no brand capital and facingfew regulatory or legal pressures.

4 For a more complete inventory, see OECD- PUMA (1999).

5 . There are many examples of such campaigns against firms operating in such diverse sectors as apparel,toys, food and extractive industries. In the apparel industry, the campaigns have focused on retailers withbrands and have largely ignored the non-branded segment of the market.

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The codes address a wide range ofissues from the sustainabledevelopment agenda and the issueareas most commonly discussedare labour relations andenvironment.

12. The codes in the OECD inventory cover a broad range ofissues and address each of the economic, social and environmental“pillars” of the sustainable development agenda. They address manyissues that are central to the debate on globalisation -- environmentalmanagement, human rights, labour standards, anti-corruption,consumer protection, information disclosure, competition andscience and technology. The inventory shows that environment andlabour relations are the most common issue areas in the codesfollowed by consumer protection and anti-corruption. Also coveredare a number of “niche” issues that attract only occasional mention(animal rights, research ethics, building local partnerships etc.).

The commitments made in thecodes exhibit significantdivergences in their scope and inthe concepts used. Even innarrowly defined issue areas, thecodes do not define a de factostandard of conduct.

13. The inventory shows divergences in the scope and natureof commitments contained in the codes, even in rather narrowlydefined issue areas (Annex 1). For example, the bribery codes areabout evenly divided among those that discuss only private to privatebribery, only bribery of public officials and those discussing both.Anti bribery concepts are also diverse in such basic areas as gifts andentertainment and the use of agents or third parties. Likewise, theonly issue area that is addressed in all supplier codes in the brandedapparel industry is child labour (although the specifics of theircommitments vary widely6). Similar divergences are found amongcompany codes in extractive industries. The divergences couldreflect underlying differences in the companies’ businessenvironments -- there can be no “one size fits all” approach tocommitment because firms operate in different sectors and indifferent countries. They could reflect “cherry picking” of issues bycompanies (companies might commit in areas where it is not costlyand ignore areas where it is). They could reflect fundamentaldifferences of view about the nature of companies’ ethicalobligations. Thus, the codes, probably for a combination of thereasons listed above, do not generally constitute a de facto standardof business conduct in the areas they cover.

6 Some make extensive commitments to protect any children that might be found to be employed by thecompanies suppliers; some mention specific ages or age ranges while others do not; some commit to theelimination of child labour but note that this may force children into less desirable occupations.

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These divergences are notnecessarily a problem. The codesmovement provides aninstitutional channel for debateamong various representatives ofcivil society.

14. This should not be interpreted as a weakness or criticism ofthese private initiatives -- private business alone is not responsiblefor the creation of such standards. Indeed, the companies involved inthis movement -- by seeking to enhance the transparency of theirnon-financial commitments -- may be making importantcontributions to the eventual formation of such standards. In effect,the code movement provides a communications channel for airingand debating ideas about norms for business conduct. The amountof dialogue and mutual influence that takes place in the codesmovement is considerable and has been facilitated in recent years byadvances in communication technology. Examples of the types ofdialog facilitated by the codes movement are described in Box 1.

This activity provides inputs intothe progressive formation ofconsensus on norms for businessconduct.

15. All of this activity provides inputs into the progressiveformation of broader agreement or consensus on norms for businessconduct. Economic thinking (for example, among developmentpractitioners) and recent regulatory and law enforcement practice --via its focus on so-called “voluntary compliance“ -- recognise theeconomic value of consensus as one of the basic building blocks thatsupports economic development and effective implementation ofappropriate norms for business conduct.

II.1 Consensus -- a basic building block for the effective control of business conduct7

We can learn from experience that management of ethical behaviour is not limited to monitoringand inspection of corruption or wrongdoing, but it is about seeking a consensus regarding goodconduct and providing a direction for action and policy decisions.

Jung-Suk Yoo,Strengthening Professional Ethics in the 21st Century

Informal conventions and normsare important intangible inputsfor any economy. Theycomplement written law andcontract.

16. Informal conventions and norms8 about what constitutesappropriate behaviour are a pervasive feature of any economic andsocial system -- they are “intangible assets” that facilitate exchangeand the effective functioning of organisations (see Coleman 1990;Williamson 1996). They have facilitated commerce throughouteconomic history and are a feature of all transaction frameworks, frombarter economies to the sophisticated markets and organisations ofadvanced industrial societies. The first anthropological field studywas motivated by the observation that primitive societies are quiteorderly despite the absence of written rules and formal enforcement 9.

7 . The material in sections II.1 and II.2 draws on work already published in German by the Austria’s FederalMinistry of Economics and Labour in Osterreichs Aussenwirtschaft, 1999-2000; see Chapter 3.6 “Rules forthe Global Economy: Voluntary versus Binding Approaches” by Kathryn Gordon.

8 . An “informal norm or convention” is used here to refer to a standard or guide for behaviour that is notcodified in law or private texts -- sometimes they are only tacitly understood by the people that adhere tothem. At times, such informal standards may underpin or precede attempts at codification.

9 . The field study in question was done by Bronislaw Malinowski in the Trobriand Islands and was publishedin 1926 as Crime and Custom in Savage Society.

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Some (e.g. North 1990) argue that advanced economies --notwithstanding their tendency to formalise rules in law andtransactions in contracts -- rely heavily on informal norms andconventions. This is because it is rarely possible to account for allcontingencies when writing out formal rules or contracts. Informalnorms tend to come into play on the many occasions when economicactors must respond to events that have not been described ex ante inlaw, regulation or contract.

Informal norms are part ofsocial capital. Much of thissocial capital is rooted innational institutions and values.For the time being, there is littleglobal social capital.

17. These informal norms are essential inputs into thetransactions process -- the economics literature uses the term “socialcapital10” to refer to, among other things, these unwritten, but widelyheld beliefs and norms (Coleman 1990). The reason the term“capital” is used is that these norms -- or agreed ways of doing things-- have economic value. They allow transactions -- trades, production,hiring of productive factors -- to take place that might not otherwisehave been feasible or they lower the costs of certain transactions (e.g.legal or monitoring costs). Generally, these norms are seen ascomplementary to formal legal arrangements -- they may facilitatecontract enforcement (by allowing contracts to be drawn up with lessdetailed treatment of contingencies and by lowering the amount thatmust be spent on third party enforcement). However, since socialcapital is rooted in culture and other institutional, economic andsocietal characteristics, it tends to be specific to nations or regions --“global social capital” is, at least for now, fairly underdeveloped.

Recent enforcement practice inlaw and regulation has tended tomove away from an exclusivefocus on deterrence…

18. Consensus about individual or business behaviour -- that iswidespread agreement on how things ought to be done -- is alsoincreasingly viewed as an essential element of law enforcement -- onethat lowers enforcement costs and increases its effectiveness (seeAyres and Braithwaite 1992). Law enforcement is often thought of asa process in which a government invests resources in monitoring anddeterrence, thereby creating an incentive system that shapes decisionsto comply with law or to engage in criminal behaviour. In return fortheir investment, societies receive a certain amount of compliance. Asimple “deterrence” approach to law enforcement relies on thefollowing assumptions: 1. Legal statutes can unambiguously definemisbehaviour; 2. All actors are fully informed expected utilitymaximisers (that is, they are homo economicus observed in anenforcement context); 3. Legal punishment (fines, imprisonment)provides the primary (indeed the only) incentive for compliance; 4.Enforcement agencies optimally detect and punish misbehaviour,given available resources (Scholz 1997). Thus, the operativeassumptions are that “good and evil” or “legal and illegal” can beeasily identified and codified and external (government) enforcers canbe relied upon to uphold the “good”, while the actors covered by the

10 A general definition of social capital is given in Nahapiet and Ghoshal (1998). Social capital is “the sumof the actual and potential resources embedded within, available through and derived from the network ofrelationships possessed by an individual or social unit (including families, business organisations or wholesocieties).”

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laws are naturally inclined to do “bad” if it is in their economicinterest.

… because it has been foundthat formal deterrence oftenaccounts for only a smallfraction of law-abidingbehaviour. Much compliancewith law appears to stem fromthe fact that it is supported bysocial norms -- individualsbelieve in the law and they maybe under social pressure tocomply with it.

19. The “deterrence” model undoubtedly provides usefulinsights, but enforcement studies show that it does not come close toproviding a full explanation of real-world compliance. Indeed, one ofthe central questions in regulatory enforcement is why compliancetends to be so high when the amount spent on deterrence is often solow. For example, Slemrod (1998) reports on studies of compliancewith income tax laws in the United States. These show that peoplepay far more in income taxes than can be explained by a rationalcalculation that balances the financial advantages of not complyingagainst its expected costs based on the probability of getting caughtand the likely amounts of penalties paid if one is caught. In fact,people appear to pay their income taxes for a number of reasons, manyof which have nothing to do with tax enforcement -- they may believeit is the right thing to do (personal conviction) or their friends andfamily may pressure them to do so (peer pressure). These findings andothers11 have given rise to increased interest in law and regulatoryenforcement circles in the concept of “voluntary compliance”; that is,compliance that occurs because of personal belief or social pressure,rather than being due to the enforcement apparatus. In this sense,voluntary initiatives and formal law and regulation draw on the samesets of social capital (or consensus on appropriate behaviour) and,hence, are complementary.

One of the challenges for thedevelopment of global norms forbusiness conduct is to amass thesocial capital on a global scale.Without this, the norms arelikely to be ineffective and anysupporting laws might beprohibitively costly to enforce.

20. Thus, there is a growing recognition that a critical mass ofunderstanding, agreement and consent underpins any effective systemfor controlling business behaviour. In effect, it lowers enforcementcosts by eliminating the need to have a policeman on every corner andan inspector in every factory. Without this agreement and impliedconsent, many laws would be prohibitively costly to enforce usingmethods that are acceptable to democratic societies. But, as notedabove, most social capital is grounded in regional cultures andsocieties -- there is as yet little global social capital. The corporatecodes movement provides one avenue through which a broad-basedunderstanding of and consensus about norms for various aspects ofinternational business conduct can be built. Indeed, this gradualmovement toward of consensus -- though still highly incomplete -- isone of the major contributions made by these voluntary initiatives todate.

11 In the area of environmental regulation, for example, Arora and Gangopadhyay (1995) state, “Compliancewith environmental standards under a schema of low surveillance and minimum fines, is in itself aninteresting phenomenon. Most firms choose to comply despite seemingly lax enforcement”. Page. 290.Compliance studies in occupational health and safety suggest that compliance is not closely related to thelevel of penalties but was influenced by detailed inspections run jointly by labour and managementrepresentatives (Gunningham and Rees 1996).

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II.2. Expertise: human capital and the social control of organisations

Newer regulatory and legalenforcement strategies draw onthe inherent willingness andability of the businesscommunity to comply. Themanagerial expertise thatbusinesses bring to bear oncompliance problems is animportant consideration in thisstrategy.

21. The recognition of the importance of voluntary compliancetends to blur the distinction between the voluntary initiativesexamined here and more binding systems of law and regulation. Thisblurring has become more pronounced as a result of recentenforcement trends. As mentioned in the fact-finding study (Annex5), regulatory and law enforcement practitioners have becomedisillusioned with purely adversarial approaches to enforcement basedon the command and control model of regulation. There is a growingrecognition that managerial expertise is often a key ingredient forsuccessful compliance with law and regulation. Newer enforcementtechniques try to promote voluntary compliance in the corporatesector, but also to draw on the sector’s compliance expertise and tointegrate this private expertise into public enforcement strategy.Many of the voluntary initiatives examined here are the reflection andexpression of growing compliance expertise within the businesscommunity (and of an associated regulatory expertise in theenforcement community).

The fact-finding projectdocumented the emergence of anew class of professionalmanager specialising in legaland ethical compliance. Variousinstitutions have emerged tosupport and spread this expertise(e.g. management standards,specialised consulting services,professional societies).

22. Annexes 2 and 5 note the emergence of a new class ofprofessional managers specialising in legal and ethical compliance.These managers now have rapidly growing professional societies andthe majority of major business schools now offer courses incompliance. NGOs have also accumulated expertise in these areas.Activities have been undertaken in business associations and in theInternational Organisation for Standardisation that allow businesses topool expertise and to share the costs of developing new managementand reporting systems (Annex 5 shows that OECD governmentscontributed to these initiatives). Numerous private companies --mainly specialised consulting companies or large audit firms --provide packages of “risk management” services (legal, managementcontrol, monitoring, record keeping and reporting and publicrelations). Work on standardisation of non-financial reportingpractices is underway in several institutional settings (e.g. the GlobalReporting Initiative).

The accumulation of expertisealso reflects the recognition thatcorporate conduct (ormisconduct) is a complexphenomenon. Some misconduct,for example, might not becalculated wrongdoing. It mightreflect lack of due care inmanaging human cognitiveconstraints, problems inmanagerial or technical controlsin dealing with risky ordangerous. Defining and

23. This accumulation of expertise reflects the high stakesunderpinning compliance in many areas and the growing recognitionthat corporate conduct (or misconduct) is a complex phenomenon.That is, there are many possible types and motivations for misconductand enforcement techniques that work for one type of misconduct donot work for others. For example one view of corporate misconduct(that differs from the calculated misconduct of the deterrence model)links it to basic human cognitive constraints -- often called “boundedrationality”. This view emphasises the fact that misconduct can arisefrom error, ignorance or innate human limitations when faced withsituations that are risky or uncertain. In addition to accounting for therisks and uncertainties inherent in most human activities, thisapproach recognises that corporate actors -- workers, managers,

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evaluating reasonable practicesin such circumstances requiresconsiderable expertise.

executives -- have only limited amounts of the information,knowledge and resources needed to control outcomes. In suchcircumstances, misconduct can occur even when the perpetrators facemajor financial penalties in the event of say, an accident, and whenthey all share a strong personal conviction that misconduct should beavoided. Safety management (ie. occupational safety or public safety)is an example. Major problems may be infrequent (so that vigilancecan be worn down by routine) and safety dispositions may form asystem, making it difficult for any single actor to identify emergingproblems. Under this view, there is often significant uncertainty orambiguity in what constitutes misconduct or in recognising it in a realworld setting. Financial and penal sanctions will often be of limitedusefulness in such situations and must in any case be complementedwith other methods (Scholz 1997).

This complexity creates a needfor voluntary initiatives, sincelaw and regulation could neverspell out good practice insufficient detail. Many of thecodes in the OECD inventory areexpressions of company’s effortsto use due care in keeping risksto an acceptable level.

24. Under this approach, rules systems help define society’s risktolerance and what constitutes due care for companies in managingthese risks. Rules writing and compliance in this setting are quitedifferent than under the deterrence model described above. First ofall, explicit rules -- in the form of codified laws -- may be impossibleto write because of the large number of contingencies that would haveto be built in to them. This creates a role for the private initiativesexamined here -- that is, these initiatives help to define and clarify theimplications of societal risk tolerances for the firm’s operations.Many of the codes and management systems examined in the fact-finding report deal with risk management issues (see, for example, theResponsible Care code and many of the “environment, health andsafety” and “consumer protection” codes).

III. Costs and benefits of voluntary initiatives

…there is one and only one social responsibility of business-- to use its resources and engage inactivities designed to increase its profits so long as it stays within the rules of the game, which isto say, engages in open and free competition, without deception or fraud.

Milton Friedman, Capitalism and Freedom, page 133. 1962

This section explores the costsand benefits of these initiativesfor companies and for thesocieties in which they operate.

25. The codes in the OECD inventory often define and describean ethical posture for business that goes beyond legal requirements(Annex 1) and beyond the Milton Friedman’s narrow view of businessethics (see quote above). As noted, some companies back these upwith management and reporting systems. One might well ask whycompanies would bother to do this and what benefits, if any, accrue tothe societies affected by these initiatives. These initiatives arepresumably costly for the companies that undertake them and maygive rise to broader opportunity costs (economic activity that mightotherwise have been undertaken if it weren’t for the initiative).

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Little quantitative information isavailable on the initiatives’ costsand benefits in particularbusiness settings. This sectionprovides general assessments.

26. This section looks at the benefits and costs of theseinitiatives in general, non-quantitative terms. The fact-finding resultscontain few quantitative assessments of benefits and costs in anygiven business or sectoral setting. The section also considers theuncertainty surrounding both benefits and costs as well as the risk thatthese initiatives may give rise to unintended consequences.

III.1. The benefits for firms

The benefits for firms ofundertaking such initiatives arepotentially numerous. They lowerrisks of costly criminalprosecutions, litigation anddamage to reputation…

27. The benefits of these initiatives for firms are potentiallynumerous. Many of the initiatives are designed to improvecompliance with law and regulation and to manage litigation risks byhelping companies show that they have exercised due care in tryingto live up to their legal and ethical responsibilities. By taking suchactions, companies hope to avoid costly litigation or legal defence,criminal or civil sanctions and damage to reputation.

… they help firms managerelations with shareholders andwith actors in the societies inwhich they operate.

28. The initiatives are also a communications tool used inmanaging relations with various elements of societies in which thebusiness operates -- companies use them to explain their positionsand actions to civil society and customers, thereby helping them toenhance company image and reputation. For publicly tradedcompanies, the initiatives help smooth relations with shareholdersespecially in view of the growing tendency for questions relating tobusiness ethics issues to be brought up during shareholdermeetings12.

In some instances, they have beenused to deflect momentum forgovernment regulation.

29. Other initiatives are at least partly motivated by a desire todeflect or pre-empt efforts for government regulation. The UKadvertising standards initiative, a highly regarded private system forpromoting truth in advertising, was designed to eliminate the needfor government regulation and is regarded as being quite effective(OECD 1997). Responsible Care, an influential private initiative13

for promoting safety in the chemicals industry, was designed in partto deflect growing political momentum to tighten governmentregulation (OECD 1997).

12 For examples of why this is necessary see Global Proxy Watch March 31st for a discussion of a majorFrench extractive industry firm’s shareholder meeting in which questions on environmental managementwere posed. In the same issue, there is a discussion of the re-shuffling of the board of directors of a majorUS-based public employees retirement fund. The reshuffle is described as signalling a greater interest insocially and environmentally responsible investing. Davis (2000).

13 Although the Responsible Care Initiative started in Canada, it has since been copied elsewhere. The codesinventory contains 5 Responsible Care codes issued by firms from the United States, Mexico, Finland andGermany. The environmental database contains seventeen Responsible Care references issued byEuropean companies.

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Employees also play an importantrole in these initiatives.Companies claim that theyimprove company morale andform the cornerstone in a broadereffort to create a “culture ofintegrity” within companies.

30. Companies also say that these initiatives help them toimprove morale and motivation among existing employees and tocompete more effectively in labour markets. In a very general sense,these initiatives are a fundamental component of broader efforts topromote a “culture of integrity” within companies. This elusiveaspect of corporate culture -- integrity -- is essential ingredient ofmanagement control in many business organisations. As a result oftechnological change and other structural pressures, companies nowtend to be flat and, hence, to have fewer hierarchical checks andbalances. Furthermore, “knowledge workers” often have de factocontrol of key proprietary intangible assets. Thus, organisationaland technological change has tended to enhance the power of manyemployees -- enlarging their scope for autonomous action and theircontrol of key resources -- and, as always, power can be both usedand abused. In some sense, then, these initiatives are the mostgeneral measure used by companies to limit the likelihood ofwrongdoing by company employees seeking to gain personaladvantage.

III.2. The benefits to society

The primary role of business insociety is to provide adequatereturns to capital and, in theprocess, produce goods andservices and create jobs.

31. The main role of the business sector in society is to provideadequate returns to suppliers of capital and, in the process, createjobs and produce goods and services that consumers want to buy.Companies often highlight this basic principle of business ethics intheir codes (see Box 2). But all the codes in the inventory containcommitments that go beyond this principle.

What justifies departures fromthis principle? Many of the codesdefine the company’s position inrelation to various types of marketfailure (e.g. environmentalexternalities, market power,information asymmetries incustomer relations). The codescan be seen as the businesssector’s response to legal andsocial pressures to redress theeffects of market failure.

32. One way to justify departures from complete reliance onthe disciplines provided by product and factor markets is to invokethe idea of “market failure”. Many of the codes explicitly addressissues of market failure14. In this sense, the potential benefits forsociety of private initiatives are closely linked to those obtained fromregulation, corporate criminal law and other policies that influencehow companies conduct their business (such as taxes and subsidies).All of these -- formal law and regulation, private initiatives -- are (inprinciple) designed to improve situations where the market does notwork well on its own. This could be due to the presence of marketpower (e.g. natural monopolies, network effects) or to other forms ofmarket failure (e.g. externalities, missing markets, informationasymmetries, public goods, co-ordination failures). In a very general

14 Examples of code language that addresses markets failures are: 1) Information asymmetry - “Providerelevant information on the hazards of chemicals to its customers (from Responsible Care); “[companies]agree not to engage in conduct that is misleading or deceptive or that is likely to mislead or deceive. “froman association code on food standards. Environmental externalities: “In the Group we are committed to:pursue the goal of no harm to people; to protect the environment; “ from an extractive industries code;Competitive practices: “Violations include agreements among competitors to fix or control prices; toboycott specified suppliers or customers; to allocate products, territories or markets; or to limit theproduction or sale of products.” from the code of a multinational chemical company.

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sense, then, the benefits of these private initiatives, if they succeed intheir objectives, are similar to (and complementary with) those onewould hope to get from (well-designed) law and regulation -- that is,the redressing of market failures.

The codes also address ethicalissues that are, in some sense,imported from the societies inwhich they operate (e.g. racism inthe workplace, fighting bribery incountries where it iscommonplace).

33. The codes also make it clear that many of the ethicalchallenges faced by businesses are, in some sense, “imported” fromthe societies in which they operate. For example, 61 per cent of thelabour codes deal with discrimination (e.g. racial, religious) in thework place (Annex 1). In this way, companies try to preventprevailing biases and prejudices from impacting on workplace orcustomer relations15. Many anti-bribery codes note that somecountries’ tolerance of corruption means that employees routinelyface demands for bribes. While it is difficult to assign tangiblebenefits to this type of ethical consideration for business, it is clearthat businesses themselves do not feel they can extricate themselvesfrom the broader ethical challenges facing the societies in which theyoperate.

Thus, the potential benefits forsociety include the alleviation ofvarious types of market failureand a more focused co-operationfrom the business community inredressing broader ethicalproblems in the societies in whichcompanies operate.

34. To summarise, the potential benefits to society of theseinitiatives are similar to the benefits societies hope to get fromregulation and corporate criminal law, with which these initiativesare often highly synergistic and supportive. The codes are thereflection in management practice of various legal, regulatory andsocial pressures that motivate the company to prevent abuses ofmarket power and to redress other sorts of market failure. The codesand associated management systems also have the potential to helpthe businesses contribute to redressing broader ethical problems.

III.3 The effectiveness of voluntary initiatives: Do they change company behaviour?

Critics of voluntary initiativesview them mainly as publicrelations ploys and insist thatthey be accompanied by externalverification and by sanctions.However, external verification isnot an straightforward process -- it requires institutionalsupports such as auditing andreporting standards.

35. Of course, if these initiatives are mere “window dressing”,then they produce no social benefits. The question then arises as towhat, if anything, makes these initiatives meaningful in terms ofchanging business behaviour. Some claim that, if the codes are notsubject to formal deterrence (external verification and related”punishments”), then they are not credible; they call for externalmonitoring and enforcement, binding laws, trade sanctions and soforth. While there might be some circumstances in which suchmeasures do have a role to play, proponents of this view seem todownplay the difficulty of external verification and of designingeffective systems of deterrence16 (Annex 2) and may underestimate

15 For example, the codes of an advanced materials manufacturing company states: “We at [company name]are committed to a policy of equal employment opportunity without regard to race, religion, nationalorigin, sex, age, disability or any other classification protected by federal state or local laws. We practiceand promote this policy in all locations.”

16 . As shown in Annex 2, external verification is not used in some compliance problems (e.g. bribery) becauseit is unlikely that an external monitor -- public or private -- would be able to detect most instances ofbribery, especially the more sophisticated forms of corrupt practice. This position also seems to ignore the

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the importance of “voluntary compliance”, already discussed above.They may also underestimate the complexity and difficulty ofensuring that individual employees actually “internalise” theincentives created by public monitoring and sanctions.

The more general problem is toget individual employees to actin response to the incentivescreated by various externalpressures, including possiblecriminal or civil sanctions forcorporate misconduct. Thevoluntary initiatives studied hereare the business sector’sattempts to translate non-financial pressures (legal,regulatory, social) into acoherent organisationalresponse.

36. The issue of how various incentives are internalised by theindividuals and groups that make up a company is central to the fieldof management control, a well-established business discipline that isclosely linked with the voluntary initiatives studied here. In corporatefinance, the counterpart of this question is: to what degree areindividual incentives within the firm aligned with shareholderinterests17? More generally, to what degree do the various social,technical and financial processes shaping individual behaviour withinthe firm form a harmonious whole permitting coherent action by theenterprise? In modern, complex corporations, formal control systemsare used to align individual employee interests with shareholderinterests and to balance these with other, possibly competing,considerations (e.g. the need to comply with the law). The voluntaryinitiatives examined in the fact-finding mission are the businesssector’s response in terms of management controls to the non-financialpressures it faces.

A crucial question is: Do theseinitiatives actually succeed inchanging business behaviour?The answer to the question is yes-- these initiatives are a crucialingredient for effective ethicaland legal compliance in thelarge, complex corporations thatdominate in the OECD fact-finding databases.

37. The businesses in the OECD codes inventory and other datasets are often very large (sometimes exceeding 100 thousandemployees) operating in dozens of countries, sometimes havinghundreds of business partners, and engaging in the design, productionand marketing of numerous products and services. These are notsmall businesses where communication can occur by word of mouthand where the owner can directly place his/her stamp on companypractices. The fact-finding mission focused mainly on large, complex,professionally managed companies. In this type of company, formalcompliance systems are essential. If no steps are taken to enlist thesupport and harmonise the actions of hundreds or thousands ofemployees and business partners, then there will be no managerialcontrol in support of ethical or legal compliance (other than thespontaneous compliance that might emerge from actions by individualemployees motivated by their own personal values).

important role that verification or auditing standards play in enhancing the effectiveness and credibility ofverification and the fact that, for non-financial verification, these are only in the early phases ofdevelopment. Likewise the components of an effective system of deterrence depends very much on theissue at hand (Ayres and Braithwaite 1992). For example, anti-corruption, occupational safety andtransport safety pose different deterrence problems and require issue specific expertise.

17 This is the central question of the branch of finance and organisation theory called “agency theory”. Seefor example, Jensen and Meckling (1976). Alexander and Cohen (1999) apply this model to problems ofcorporate crime and find that corporate crime tends to penalise shareholders. The sample is 109 USpublicly traded companies convicted of US Federal crimes between 1984 and 1990.

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However, the businesscommunity’s main role is toprovide the managerial expertiseneeded to reflect social, legal andregulatory pressures into businesspractice. It is up to society as awhole (of which business is a part)to decide what those pressuresshould be.

38. Thus, private initiatives reflect managerial expertise thatallows companies to blend short- and long- term profit pressures, aswell as non-financial pressures, into coherent corporate activity andresponse. However, in the non-financial dimension, these initiativeshave no more credibility or force than the social, legal and regulatorypressures that shape them. If these private initiatives are successful,it is a testimonial not only to the competence and expertise of thebusiness community, but also to the ability of societies to formulate,communicate and channel reasonable pressures for appropriatebusiness conduct. In this sense, the success of voluntary initiativesis inextricably linked to the external pressures -- law and softer waysof influencing behaviour -- that the business faces. One oft-citedanalogy is that regulation and other pressures are one wing of anaircraft, while business control systems (financial and non-financial)are the other wing. If the aircraft is to stay on course, both wingsmust be well designed and functioning properly.

Therefore, the question of whetheror not these initiatives areeffective cannot be answered bylooking only at what businessesdo. If they are effective it isbecause societies manage toformulate and channel reasonablepressures for appropriate businessconduct.

39. Thus, it is difficult to separate the effectiveness of theseinitiatives from that of the social and political, legal and regulatorycontext in which they develop -- that is, from the suitability andeffectiveness of both private and public governance. For example,private initiatives in support of legal and regulatory compliance willbe undermined if they are associated with regulatory or legal systemsthat are inefficient, poorly designed or corrupt. Likewise, if thebasic institutions of democratic societies are not in place, then thepressures coming from the media, from representatives of civilsociety or from the political arena will be absent. If trade unions andother institutions for promoting transparency in labour relations aresuppressed, then measures designed to raise workplace standardswill be hobbled. Private initiatives for corporate responsibility havean important and distinctive contribution to make as part of abroader system of private and public governance. However, theycannot work well if other parts of the system work poorly.

III.4. Voluntary initiatives in a broader governance context

Should our regulatory institutions be designed for knaves or should they be designed to fostercivic virtue? Our answer has been that they should be designed to protect us against knaveswhile leaving space for the nurturing of civic virtue.

Ian Ayres and John Braithwaite, Responsive Regulation. Page 53.

The costs and benefits of privateinitiatives depend on finding ajudicious combination of privateand public action.

40. Both the costs and the benefits of private initiatives dependon whether or not societies manage to combine public and privateaction in effective mixes. No system for controlling business conduct-- binding or voluntary -- is perfect and each has its distinctivestrengths and weaknesses. Private initiatives are not alone insuffering from credibility problems -- that is, from the belief that theinitiative will not have the impact it is supposed to have. Indeed, thecredibility (or lack of credibility) of many types of public policy --

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fiscal, monetary and regulatory -- is frequently called into questionand OECD experience with regulation shows there have been seriousand pervasive problems [see OECD 1999, OECD 2000 and Gonencet al. (2000)]. These include inflexibility, regulatory inflation18,capture of the regulatory process by interest groups, ineffectivenessand unintended consequences. Poorly designed and implementedregulation has imposed large costs on individual companies and onOECD societies.

Although the two approaches bothoffer distinctive strengths andweaknesses, the tendency now isto look at them as largelycomplementary efforts.

41. Box 3 describes the differences between binding laws andvoluntary “standards” and highlights the strengths and weakness ofthe two approaches. But, as already noted, emerging regulatorypractice within the OECD tends to treat public regulation and privateinitiatives as complementary, rather than competing, approaches.Judiciously used, private initiatives help to lower the costs ofregulation and to enhance its effectiveness. The difficulty for bothpublic and private actors is determining the appropriate mix ofprivate and public action. Important questions include: To whatextent should public enforcement rely on private compliance efforts?What should be done if a company is found to be operating in badfaith? Which firms should be inspected and what should theinspection consist of? Should the public enforcement authority try toimpose a standardised compliance system or should it let firmsdevelop their own systems? All of these questions must be answeredon a sector- and issue-specific basis. Again, this is an area whereregulatory and compliance expertise is being accumulated.

III.5. Cost uncertainty and unintended consequences

There is little quantitativeinformation on the costs andbenefits of these initiatives. It isexpected that information willaccumulate as experience growsin different business sectors anddifferent regions.

42. There is often considerable uncertainty as to the size andnature of the cost and benefits of these initiatives, but they are beingclarified as experience grows. For example, even in one of thebetter understood areas (environmental management systems), it isunclear whether initiatives in this area are a cost (reducing the valueof companies) or an investment (increasing it). One web site for ISO14001 managers implies that the net present value of its members’“investment” in ISO 14001 implementation was positive (The ISO14001 Information Guide, 1999)19. Thus, for that group ofcompanies, ISO 14001 was not a cost item on average at all; rather ityielded a net financial benefit.

18 Regulatory inflation refers to the continual growth of attempts at regulation arising from the lack ofconstraints on the growth of rules and regulation. Attempts at producing “regulatory budgets” have so farbeen unsuccessful.

19 The service states that annual savings due to ISO implementation were more than $200,000 per year withan average project length of 12 months. The ISO 14001 implementation costs were, on average, between$25,000 and $128, 000, depending on the size of the firm. At any reasonable cost of capital, these figuresimply that the net present value of ISO 14001 implementation was highly positive, on average, for theseorganisations.

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These initiatives can haveunintended, adverseconsequences. Problemsassociated with the initialphases of a campaign toeliminate child labour in thePakistani soccer ball industryprovide a case of point…

43. These initiatives also occasionally have “unintendedconsequences”. The background associated with one of the businessassociation codes in the OECD inventory shows how problems caninadvertently arise from well-meaning initiatives. The code emerged asa result of what is now an infamous case of unintended consequences ofNGO activity -- in this case, in response to the revelation that childrenwere involved in the production of soccer balls in Pakistan. As a resultof NGO activity, soccer balls suppliers in Pakistan were instructed tostop employing children immediately, which they did. However, sincemany of the children had been brought in from surrounding areas towork in factory-type situations, they ended up on the streets withoutcaretakers or family supervision.

… and subsequent attempts toachieve the gradualelimination of child labour inthe industry may haveinadvertently undermined theeconomic position of women inthe region.

44. In a further development of this same episode, soccer ballretailers worked extensively with the ILO and with NGOs to restructureconditions of production in the Pakistani soccer ball industry. Their aimhas been the progressive elimination of child labour. This restructuringincreased the market share of formal, factory-like production sites(“stitching centres”), while decreasing the market share of “cottage” orhome-based production (where it is more difficult to controlparticipation of children). But this shift also undermined the economicautonomy of adult women in the region, who are less involved infactory work than in home-based production (see UK Cabinet Office,2000 page 161). This was another largely unintended consequence.

This underscores the need toproceed carefully with theseinitiatives and with duerecognition of the difficulty ofpredicting outcomes thatinvolve complex interactions ofsocial, economic andenvironmental factors.

45. This example underscores the need to proceed carefully withcorporate responsibility initiatives and to have adequate knowledge oflocal conditions. It also points to the difficulty of predicting outcomesfor initiatives that involve complex interactions of social, economic andenvironmental factors. Another issue raised by these examples is thedegree to which there is transparency and accountability in the NGOcommunity. These organisations use their (sometimes considerable20)resources to persuade other actors to do things that generate patterns ofgains and losses in various parts of the globe (e.g. people may bethrown out of work or their businesses may be destroyed). Clearly,NGO actions have occasionally resulted in consequences that rangefrom highlyundesirable to, at the very least, questionable. Many of theNGOs themselves agree that with their “influence” comes responsibilityand, hence, a need to make themselves accountable for their actions (seethe web-site of “Action Contre la Faim21”, for example).

20 For example, the international secretariat of a well-known human rights group has a budget of nearly17,000,000 GBP. This is in addition to the national budgets of the same group.

21 www.acf-fr.org

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IV. Implications for International Economic Policy

The main political messageemerging from this analysisof voluntary initiatives is apositive one. Viewed aswhole, the initiativesexamined in the course of thefact-finding project representa global effort to addressserious issues of businessethics. They have contributedto the basic building blocks --consensus and expertise --that will eventually permitglobal convergence of normsfor business conduct.

46. The voluntary initiatives analysed here should be accorded animportant role in the dialog between OECD governments and theirconstituencies about globalisation. Unfortunately, the message stemmingfrom the initiatives is not one that lends itself to media-friendlypresentations nor does it hold the promise of easy or quick solutions.Nevertheless, it is an important and positive one -- these privateinitiatives contribute to the basic building blocks of a system that willeventually permit meaningful convergence of economic, social andenvironmental standards among the countries of the world. The fact-finding mission has shown that progress varies by issue area and withinand across regions, but that it has nevertheless been significant andglobal. These efforts represent a serious endeavour -- involvingenterprises on at least four continents -- to address numerous problems ofbusiness ethics. The business community -- working with other civilsociety actors and with governments -- has developed principles andmanagement methods for addressing a range of issues about which itwould have been incapable of organising any systematic response even asrecently as two decades ago.

But the job of creating globalnorms for business behaviouris not likely to be finished anytime soon.

47. Of course, progress is ongoing and the job of achievingappropriate norms of conduct for international business is not likely to befinished any time soon. The fact-finding report found significant variationof practice and commitment that cannot be easily attributed to differingbusiness circumstances. Business communities in some countries areheavily involved in developing and implementing these initiatives and notinvolved at all in others. The fact-finding data set consists mainly oflarge, publicly-traded companies -- data on what other types ofcompanies are doing in this area are scarce, but what is available suggeststhat adoption of such practices may be less common among small, closelyheld companies. Basic institutional supports (e.g. non-financial auditingand reporting standards) still need to be developed, disseminated andtested in a variety of business situations.

OECD governments havealready done many things toshape these private initiatives.

48. What should governments be doing to enhance the effectivenessof these initiatives? The fact-finding report suggests that OECDgovernments have already done a lot -- many of these initiatives areclosely linked to national policy environments from which they haveemerged. The relevant policies adopted to date have tended to avoiddirect control, working instead through indirect influence (taxexpenditures on the NGO sector, incentives under regulatory and lawenforcement arrangements, etc.). So far the indirect approach appears tohave been successful in encouraging the business community andgovernments to co-operate in making both more effective. These policieshave also encouraged the acquisition of compliance expertise in thebusiness community. Governments have also added their voices to thedebate about behavioural norms through such instruments as the OECDGuidelines for Multinational Enterprises.

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The indirect policy stancecurrently adopted by many OECDgovernments is likely to continueto be a promising one in mostissue areas. It promotes andcontributes debate and allowsexperience and knowledge to beaccumulated while avoiding thepotential dangers of directgovernment intervention (captureby interest groups, rigidity andinability to respond to changingcircumstances).

49. In many issue areas, the indirect approach is likely to be amore effective policy stance for governments than more direct typesof intervention. This contrasts with the view of some thatgovernments need to add “teeth” to voluntary initiatives in order tomake them effective. The indirect approach encourages businessesand societies to continue feeling their way forward. It allows opendialogue to take place and experience and knowledge to beaccumulated while avoiding dangers of direct intervention (captureby vested interests, inability to respond to changing circumstances,etc.). The follow-up process of the OECD Guidelines forMultinational Enterprises has the potential to play an important rolein reinforcing the indirect strategy already adopted by governmentsby contributing to dialogue and to the dissemination of knowledgeand experience.

Any global system of norms thatwill eventually emerge is likely toinvolve combinations of publicand private action. Building aworkable set of global normspromises to be an arduousprocess in which policycommunities with issue-specificexpertise will be importantplayers. The challenge for theinvestment and trade communitieswill be to work with others whilepromoting their own basic values -- transparency, investmentprotection and non-discrimination.

50. In any case, the expertise and slow movement towardconsensus that voluntary initiatives are helping to promote will beuseful in future international policy endeavours, regardless of theform these happen to take. Any global system of norms willundoubtedly feature important elements of co-operation between thebusiness communities and governments. This will be trueinternationally for the same reasons it has been true domestically --in many cases, adversarial approaches do not work well and aremore costly than co-operation. Building a workable set ofbehavioural norms for international business promises to be a longand arduous process that will, for the most part, have to emerge fromthe policy communities with the necessary issue-specific expertiseand political accountability. The challenge for the investment andtrade policy-makers will be to work constructively as part of thispain-staking process. In particular, this will mean working with theissue-specific policy communities while promoting the basic valuesof the investment and trade communities -- transparency, investmentprotection and non-discrimination.

In any global system thateventually emerges, there willcertainly be a role for formaldeterrence of some sort. Butsystems for monitoring anddeterring misconduct on a globalscale will require accumulation ofglobal expertise.

51. Of course, the critics of voluntary initiatives are notentirely wrong. It would be naïve to think that a meaningful systemof global norms could exist without any formal deterrence. . Thefact-finding piece has shown that many “voluntary” initiatives areunderpinned by significant threats of monetary damage (legal costs,fines, loss of reputation capital) or other sanctions. However, theanalytical paper has shown that the design of deterrence is notstraightforward -- regulatory and compliance expertise is required tomake deterrence work and the methods deployed depend very muchon the compliance issue (e.g. bribery is different than control ofsupply chain). Thus, while there is certainly a role for deterrence,effective global methods in most areas will probably emerge slowlyout of national pools of expertise and from gradual convergence ofnational practices. The OECD Bribery Convention -- which obligessignatory governments to enact laws and criminal sanctions againstbribery of foreign public officials -- is one example where the

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international policy community has been able to promoteconvergence of legal norms for enterprises in their global operations.Note that enforcement of this initiative is based on deterrence andcompliance expertise located in adhering countries.

Credit for the success of someprivate initiatives does not belongonly to the business community.This paper has argued that it isalso due to the success of broadersocial, economic and politicalprocesses. The OECD’s peerreview and outreach activities canhelp OECD and non-membersocieties improve publicgovernance, which will alsocontribute to the effectiveness ofprivate initiatives.

52. Another important role for OECD governments -- indeedall governments -- is to initiate a process of continual improvementin public policy and to maintain peer pressure on one another in thissame area. This paper has shown that any credit that might be duefor the success these voluntary initiatives does not belong only to thebusinesses that undertake them. It is also due to the effectiveness ofbroader social, economic and political processes. These allowpressures -- financial, social, legal, regulatory, political -- to befocused onto the business community. Open and democraticsocieties increase the likelihood that governments will fulfil theirroles (providing public services) and will avoid putting businesses inthe position of having to address problems that stem mainly fromfailures of government (e.g. corruption in public services, publicspending that favours wasteful expenditures on political elites to thedetriment of spending on basic services such as primary education).This is area in which the OECD’s peer review and outreach activitieshave important contributions to make.

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Box 1. Consensus-building and voluntary initiatives --examples from the codes inventory

Dialogue among the business, labour and NGO communities: Some of the codes represent co-operativeefforts among firms, NGOs and labour unions. Thus, in the course of writing and promoting them, dialogamong representatives of civil society took place. Examples of this kind of code include SA 8000 on corelabour standards and CERES on the environment. Likewise, the codes that are part of collectiveagreements were negotiated between business and trade unions.

Dialogue within the business community: Some of the most influential codes in the inventory have beenissued by business associations and represent the fruit of extensive consultation and pooling of expertise.Business association codes account for 37 per cent of the OECD codes inventory. Prominent examples ofthis kind of code within the OECD inventory include Responsible Care in the chemicals industry, theBusiness Charter for Sustainable Development on environmental management and the British Code ofAdvertising and Sales Promotion.

Comparing and evaluating codes: Specialised NGOs have produced databases and publications providingassessments of the content of corporate codes and of their efforts to implement these codes. Prominentexamples of NGOs providing this kind of service are Ethical Investment Research Service (EIRIS) andCouncil on Economic Priorities. These not only inform civil society and institutional investors, but alongfirms to see how their commitments stand relative to other firms.

Government contributions: Various OECD governments have added their voices to the debate by issuingmodel codes. The revised OECD Guidelines, as the only multilaterally endorsed comprehensive code ofconduct for multinational enterprise, contribute in important ways to dialogue and growth of consensus.

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Box 2. The Business of Business is Business --Direct Quotes on this Theme from Individual Company Codes of Conduct

Our first priority is to be a profitable business and that means investing for growth and balancing shortterm and long term interests.

From the Chairman’s message in the code of a major consumer products company.

[Company name] is committed to increasing its value to customers, employees and shareholders byprofitably providing beneficial products and services to world-wide markets.

From the code of a North American chemicals manufacturer

The objectives of [Company group names] are to engage efficiently, responsibly and profitably in the oil,gas, chemical and other selected businesses and to participate in the search for and development of othersources of energy. [Company group names] seek a high standard of performance and aim to maintain along-term position in their respective competitive environments.

From the code of a major petrochemicals company

[Company name] is a growing worldwide company dedicated to excellence through quality -- creatingvalue for customers, employees and shareholders through innovation, technology and operationalexpertise.

From the code of a leading metals company.

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Box 3. A comparison of binding laws with voluntary initiatives

Uniformity and consistency.

Formal codified and enforced law tends to have the advantage of relative consistency anduniformity of standard (see, for example, Webb and Morrison 1996). In contrast, actors involuntary systems sometimes (but not always) have trouble defining and achieving uniformstandards. The codes showed great diversity in coverage of issues, with only half of the codesmaking commitments to fundamental human rights in the workplace, such as freedom ofassociation. This diversity of commitment might stem from differing circumstances of theapparel firms, but it could also signal that different firms apply different standards.

Flexibility and responsiveness to changing circumstances.

The positive side of the non-uniformity problem posed by voluntary corporate control systems istheir flexibility or their ability to adapt to the circumstances of individual firms or to theparticular requirements of a sector or location (Ayres and Braithwaite, 1992). Voluntary effortsoften have the advantage of flexibility and adaptability to changes in structural conditions overtime. This tends to lower what economists call the dead-weight costs (i.e. the value of lostoutput) of the codes (relative to those associated with more rigid rules).

In contrast, public law making or enforcement authorities may far be removed from theprocesses that society is attempting to control. Often, they do not have the information neededto design high quality laws or to enforce them effectively (that is, with due concern for individualcircumstances). In addition, both the legislative process and the enforcement apparatus may besubject to considerable inertia. As a result, the system of rules and enforcement can quickly getout of alignment with the underlying structural conditions, especially in fast moving sectors. Astudy of regulatory systems in the OECD (OECD 1997) characterises them as containing“enormous inventories of rules and formalities that have survived without any seriousexamination for years or even decades.”

Effectiveness and cost of monitoring and enforcement

There is no clear “winner” in the comparison between binding and voluntary systems in this area-- analysis noted earlier supports the view that monitoring by civil society or by privatespecialised agents tends to support and complement public monitoring. All external monitoring,both public and private, suffers in varying degrees from the same basic problems -- how effectiveare external monitors likely to be in discerning misconduct that may be cleverly disguised orinherently difficult to perceive? How independent are the external monitors from various partiesthat are being monitored? Imperfect monitoring and enforcement gives rise to the so-called“free rider” problem (Purchase 1996). The free rider can benefit without paying or can imposecosts on others without compensation. For example, a firm might use the label of a privatequality control association without actually adhering to the norms established by the association -- thus, it benefits from the scheme without fully bearing its costs. The free rider problem -- thatfirms say they are observing high standards, but do not -- is one of the main reasons for publicdoubts about the credibility of voluntary efforts.

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However, most government policies, including regulation, also have credibility problems --indeed, policy credibility is one of the most basic issues addressed in public policy analysis. Inthe labelling scheme just described, the free riding problem stems from imperfect monitoring (arefirms really respecting the quality standards?). Clearly, public labelling schemes can pose thesame monitoring problems as private schemes.

As noted in Annex 2, firms and NGOs are aware of these enforcement problems and have beenbusy trying to address them by building private monitoring and enforcement capacity. Effortsinclude establishing norms for record keeping, developing specialised training programmes,refining the use of whistle-blowing facilities and developing external monitoring services,including formal audits.

Capture by vested interest groups.

Although regulatory economics often looks at regulation as if it were governed by the benevolentobjective of serving public needs, practical experience shows that this is often not the case (seeGonenc et al. for a discussion of OECD experience with regulation). One weakness of systemsthat are designed and/or enforced by governments is their susceptibility to capture by interestsgroups (for example, Peltzman (1976) and Stigler (1971)). The scope for such capture isincreased when information asymmetries make it difficult for civil society to hold regulatorsaccountable (Laffont and Tirole, 1993). Despite attempts to increase the transparency and publicaccountability of regulatory processes, the quality of the written law and enforcement may stillsuffer as the regulatory apparatus is captured by the more politically well-connected actors andmade to serve their interests. Voluntary corporate efforts may be subject to influence by vestedinterests as well. For example, the private firms that audit corporate performance in labour andthe environment have occasionally acted like vested interests in private international standards-setting fora such as ISO. However, the voluntary movement is less susceptible to vested interestsbecause its decision-making apparatus tends to be less centralised than in government-led bindingsystems.

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